Teleflex Incorporated — Q3 2010 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 26, 2010, compared with the corresponding periods in 2009. Teleflex is primarily a global medical technology company, with Aerospace and Commercial businesses. Medical, Aerospace and Commercial contributed 79%, 10% and 11% of nine-month 2010 revenue, respectively.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $443.0 million | $440.7 million | $1,325.9 million | $1,295.0 million |
| Gross profit | $203.1 million | $196.3 million | $606.2 million | $578.9 million |
| Gross margin | 45.8% | 44.5% | 45.7% | 44.7% |
| Income from continuing operations | $23.4 million | $34.2 million | $101.0 million | $90.8 million |
| Net income attributable to common shareholders | $22.2 million | $38.3 million | $120.0 million | $260.3 million |
| Diluted EPS | $0.55 | $0.96 | $2.98 | $6.52 |
| Operating cash flow from continuing operations | Not stated for quarter | Not stated for quarter | $146.8 million | $70.7 million |
Q3 continuing-operations income included a $30.4 million loss on debt extinguishment from refinancing. Without that unusual charge, reported pretax income would have been higher; the filing does not provide an adjusted earnings figure. Q3 included a $6.0 million tax benefit on continuing operations, with a negative 34.3% effective tax rate. Nine-month effective tax rate was 20.8%, versus 22.8%.
Nine-month capital expenditures were $23.8 million. Investing activities from continuing operations provided $52.1 million, including proceeds from business sales. Dividends were $40.7 million for the nine-month period, or $1.02 per share.
Changes versus prior comparable periods
- Q3 revenue increased about 1%; management reported 4% core growth, offset by 2% adverse currency effects and 1% from deconsolidation of a variable interest entity. Nine-month revenue rose about 2%, with 3% core growth.
- Q3 gross margin improved 1.3 percentage points, while SG&A rose to 27.9% of revenue from 25.8%. Management attributed higher SG&A chiefly to increased Medical sales, marketing, regulatory and administrative spending, plus refinancing professional fees.
- Q3 segment revenue was down 2% in Medical, up 2% in Aerospace and up 15% in Commercial. Medical operating profit fell 10%; Aerospace and Commercial operating profit rose 80% and 51%, respectively. Nine-month operating profit rose 4% overall, with segment gains in Aerospace and Commercial offsetting a Medical decline.
- Q3 net income and diluted EPS declined partly because of the refinancing charge. Nine-month net income was sharply lower than 2009, when results included substantial discontinued-operation disposal gains; continuing-operations income increased year over year.
- Cash from continuing operations increased by $76.1 million year over year, helped by the absence of a 2009 tax payment related to the ATI sale and a 2010 tax refund. The filing says adoption of receivables-securitization accounting reduced operating cash flow by approximately $39.7 million.
Debt, liquidity and capital structure
- At September 26, 2010, total borrowings were $1,085.6 million, cash was $247.8 million and net debt was $837.8 million. Net debt to total capital was 33%, compared with 39% at December 31, 2009.
- August refinancing issued $400 million of 3.875% convertible senior subordinated notes due 2017, repaid $200 million of term loans and prepaid $196.6 million of 2007 notes, including a $28.1 million make-whole payment. The company extended $363.9 million of term loans and $366.3 million of revolving commitments to 2014.
- The convertible notes had a $400 million principal amount and a $317.8 million net carrying amount after unamortized discount. The company also purchased call options for $88 million and sold warrants for $59.4 million. Warrants may be dilutive or could require cash payments under specified conditions.
- The $400 million revolving facility had no outstanding borrowings and approximately $4 million in standby letters of credit at quarter end. The filing states management believed operating cash flow and access to credit would fund operating needs, capital expenditures and debt obligations.
- Adoption of revised securitization accounting brought receivables back onto the balance sheet and classified $34.7 million outstanding under the program as secured short-term borrowing.
Outlook, risks and unusual items
- No specific consolidated revenue or EPS guidance is provided in the filing. Management expected annual pretax savings of $70–$75 million after Arrow integration and restructuring actions are complete, and $3.5–$4.5 million of 2010 savings from the completed Commercial restructuring. A further $0.5–$0.9 million of Arrow-related restructuring charges was expected in the remainder of 2010.
- Management estimated the medical-device excise tax enacted under health-care reform would cost approximately $16 million annually beginning in 2013. It noted that insurance expansion could support product utilization, while cost-containment measures could pressure pricing.
- Arrow’s FDA corporate warning letter remained open. FDA inspection observations were classified as “voluntary action indicated,” and eligible foreign-government certificate requests were approved, but further regulatory action remains possible if remediation is deemed inadequate. A voluntary recall of custom IV tubing continued to weigh on Medical vascular-access sales.
- Environmental matters carried an accrued liability of approximately $7.9 million; management noted actual exposure could exceed the accrual and estimated payments could extend 15–20 years. The company also disclosed ordinary-course litigation and tax examinations; it did not believe current litigation was likely to be material, while acknowledging unfavorable outcomes could be adverse.
- After the September quarter, the company expected to record approximately $24 million of previously unrecognized tax benefits in Q4 2010 following tax-period closures and completion of an examination. Q3 also included a $5.7 million out-of-period tax adjustment, which management considered immaterial to the prior period.
- Management identified risks including FDA resolution, customer or supplier changes, product demand and acceptance, integration and restructuring execution, competition and pricing, raw-material costs, currency and interest rates, and general economic conditions.
Important facts for investors to verify
- How the $30.4 million refinancing loss, ongoing interest costs and new debt terms affect future earnings, cash interest and covenant headroom.
- Whether Medical sales and operating profit recover from the IV tubing recall, currency pressure and elevated commercial, regulatory and R&D spending.
- Whether Arrow obtains formal closure of the FDA warning letter and whether further remediation costs or product restrictions arise.
- Whether the stated restructuring savings are achieved and the remaining expected charges stay within the disclosed range.
- Whether the estimated $24 million Q4 tax benefit is recorded as expected, and how healthcare reform’s excise tax affects results from 2013.
- The potential dilution or cash obligations associated with the convertible-note warrants, and the ongoing effect of securitization accounting on reported operating cash flow and short-term debt.